Navigating Health Care: 2014 and Beyond

The Affordable Care Act will significantly impact corporate profits, productivity, operations, and hours worked by employees. Can your company survive?
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On March 23, 2010, President Obama signed into law the Affordable Care Act (known as Obamacare). The law, now more than 2,700 pages in length and expected to exceed 17,000 pages when rules and penalties are finalized, puts in place comprehensive changes that seek to improve access to affordable health coverage for everyone. Obamacare also seeks to protect consumers from potentially abusive insurance company practices.
Supporters of Obamacare claim the law allows all Americans to make health insurance choices that “work for them,” while guaranteeing access to care for vulnerable members of the population. They contend it provides new ways to bring down health care costs and improve the quality of care.Opponents say President Obama’s assertions that people can keep their current health care plan are false. Additionally, the president said the law would save families money, although a recent independent study conducted by the Society of Actuaries shows expected changes in membership of the individual health care providers is expected to drive up claims costs an average of 32 percent nationally by 2017.

Among the states to be impacted the most, due to differences in underwriting practices, demographic characteristics, income level differences, and other issues are Ohio (80.9 percent), Wisconsin (80.0 percent), and Indiana (67.6 percent). Michigan, according to the study, will see costs rise 25.8 percent, on average, over the next four years.

“Companies need to get up to speed very quickly, or they could face considerable fines and penalties as a result of Obamacare,” says David Bommarito, founder and CEO of The Benefits Group Inc., a full-service employee benefits firm in Rochester Hills. “A company may have to bring on more independent contractors to maintain or expand revenue, but even there you might run afoul of Obamacare.”

What’s more, elaborations to the ACA, including amendments and regulatory rollouts, are expected to add thousands of pages to the law. In addition, the implementation of the law may be hamstrung if Republicans are successful, under U.S. Rep. Paul Ryan’s (R-Wis.) proposed budget, in eliminating $900 million of funding for Obamacare’s administrative costs. Ryan serves as chairman of the House Budget Committee.

The new legislation also offers new federal- and state-operated exchanges, where citizens can select from a variety of health care insurance plans. As it stands, Michigan customers will shop on the federal government’s exchange. Apart from Washington’s ability to enact higher fees on employer-sponsored health care insurance plans, which undercuts Obama’s claim that citizens could keep their current insurance plans, several Constitutional challenges are on the horizon. The most serious challenge focused on the mandates of universal health care coverage.

Washington’s ability to levy stiff fines (penalties), or impose surrogate taxes on individuals and firms that fail to comply with the newly adopted statute, were just a couple of many issues needing resolution. The issues found their way to the United States Supreme Court by 2011, which upheld the ACA in June 2012 on the grounds that the “penalty” was indeed a legitimate “tax.” In the wake of that decision, the overall discussion has shifted to the mountainous task of understanding intricacies in the law.

 

Despite surviving a Supreme Court challenge, additional legal challenges to the ACA will be seen in the months and years ahead, including those protesting the “legitimacy” of the law’s birth as a bill. One such challenge comes from California’s Pacific Legal Foundation, which seeks to persuade the court that ACA legislation unequivocally began in the U.S. Senate, when the Constitution explicitly requires that all tax legislation originate in the U.S. House of Representatives (Article 1, Section 7).

Another grievance against Obamacare likely to appear in courts will assert prejudicial or unequal dispensing of financial distress waivers that have been granted to 1,625 existing union and business health-care plans. The waivers currently cover some 4 million individuals — predominantly union members and their families, which, as election campaign records show, largely backed President Obama in both presidential elections.

Waivers exempt a health care plan from costly mandates, thus raising fairness issues among employers who are unable to obtain such dispensation from ACA-formed panels. Also, aggrieved health-care providers almost certainly will challenge reimbursement arrangements that delay or deny payments to hospitals and physicians, especially those taking Medicare patients. Threats to clip payments to Medicare providers in order to fund the ACA were a contentious issue during the most recent presidential debates.

Even greater legal and financial challenges will occur over the next two years due to the ACA’s proposed expansion of Medicaid. As of April 1, 33 states — including Michigan — had not accepted the option to join Obamacare’s health exchanges. Many governors fret over their own already-precarious budgets. They worry that acceptance of the ACA’s “opt-in” provision will invite another 20 million low-income patients into a joint state/federal insurance program that’s already in crisis.

Medicaid today absorbs an average of 24 percent of state budgets, and Medicaid costs are rising 8 percent per year. As individual “out-of-pocket” spending on health care hits an all-time low of 9.4 percent of total personal spending on health care — and continues trending lower — states anticipate greater demands on their budgets. With Medicaid spending nearing half a trillion dollars nationally, and the Congressional Budget Office estimating average growth of more than $64 billion yearly, and auditors citing fraud estimates of up to $60 billion per year, it is no wonder individual states have not rushed to “opt in” to ACA’s expanded Medicaid coverage provisions. Moreover, despite the Supreme Court’s decision that leaves an opt-in or opt-out decision with the states, the new law leaves “no escape hatch” once the decision to join has been taken. 

Greater uncertainty and political polarization may lie ahead in the 2013-2018 rollout of the plan. Early reviews of the act’s known taxes, subsidies, caps, costs, and other restrictions tend to befuddle ordinary businesses, based on interviews with area entrepreneurs and managers of small to mid-sized businesses. Business leaders question the ability of their enterprises to absorb costs and comply with the letter of the law, while accommodating increasingly apprehensive, but productive, employees.

Threshold Resistance

As a cautionary measure, some entrepreneurs say they have kept their full-time employment head counts below 50 workers. They’ve done so in order to escape many of Obamacare’s higher tax rates, punitive reporting requirements, and other regulatory burdens attached to larger-firm classifications.

In addition, they express nervousness regarding IRS formulas covering the lumping of their part-time staff into “full-time equivalence (FTE)” for the purpose of determining an employer’s obligations to provide health-care coverage under ACA rules. They admit to exploring options for staff reductions, depending on whether ACA rules will require aggregation of workers in differing portions of their operations.

The 50-employee threshold, so far, has inspired businesses to consider three principal adaptations:

First option: Firms that are approaching an FTE threshold of 50 workers, but remain eager to expand their business, can hire independent contractors for tasks that lend themselves to outsourcing (for example, marketing or accounting).

Second option: Employers have the choice to calculate head counts by averaging the full 12 months of 2013 or a consecutive six-month period during the year. To avoid the health-care law’s penalties, many small employers are considering hiring only part-time workers to keep their head count down during the months to be averaged.

Third option: Firms deliberately curb growth in order to avoid hiring. 

There are some good and bad aspects to each of these options, but the overriding imperative is to preserve profitability. Outsourcing, for instance, can improve the focus on and the quality of internal work while accruing advantages offered by project specialists outside the firm.

In addition, the use of independent contractors can save on labor costs, such as administrative hiring, firing, and daily personnel matters. This largely explains why independent contracting has grown rapidly, both during and subsequent to the “Great Recession.”

Such strategies may be accompanied by some risk. Government auditors will be keen to uncover worker misclassifications, thus triggering ACA fines that exact both back taxes and penalties. Apart from legal concerns, outsourcing can lower direct management oversight and coordination, thereby potentially reducing employee morale.

 

Unquestionably, Obamacare will have far-reaching consequences for businesses and workers alike. Here are some of the ways in which the law will impact key groups. 

Small Business (1 to 49 workers)

Unfortunately, most small businesses, until recently, have been under the illusion that they had substantial time (all of 2013) to prepare for Obamacare. But under an ACA “regulatory guidance” issued during the stealth period of year-end holiday festivities in 2012 and the distraction created by the impending “fiscal cliff,” firms on an FTE cusp (30 full-time employees) are obliged to make 2013, not 2014, their benchmark year for FTE accounting. (Some exchanges may be delayed until 2015).

Essentially, only the smallest businesses will be exempt from penalties if they don’t offer health-care insurance in 2014. Indeed, in a Wall Street Journal article on Jan. 17, employment law attorney Penny Wofford remarked, “It’s such a complex law, and most employers don’t fully understand it. But they must get a handle on it (as soon as possible) so they have the option to make adjustments.”

Medium Business (50 to 249 workers)

Between small and middle-size firms is a prominent and vulnerable hybrid known as the franchise operation. One example is the fast food franchise industry (Wendy’s, Taco Bell, Papa John’s, etc.). Typically, such operations are owned and managed by a franchisee who employs a fair number of full- and part-time workers, many of whom are young with relatively little work force experience.

Operating on thin profit margins, franchise owners may shudder at the thought of adding upward of $1.70 to $2 per hour to the cost of an above-minimum-wage worker whose productivity barely exceeds his or her compensation package to begin with. In order to survive, some franchisees admit to considering layoffs, reducing hours and benefits, and possibly liquidating their investment, if all else fails.

Their defensive strategies are the norm, not the exception. In terms of economic trade-offs, their commentaries on Obamacare conjure the law of unintended consequences: In an effort to bring universal health-care coverage to workers, the reality is very likely to be greater unemployment, especially among older and younger workers, as well as less expansion among smaller businesses and entrepreneurial segments of the economy.

By way of example, two-thirds of new job providers in the U.S. economy are found in these two business niches, so there are threats to the nation’s economic vitality if the ACA’s implementation harms the underlying profitability of established firms.

Large Business (250+ workers)

Some larger firms, often with factories and office assets in many states, also find themselves in a quandary. Despite access to the finest financial, legal, and industry-association consultants, as of 2013 these owners and managers frequently have no idea how they will navigate the ACA.

New health-care laws imposed on large businesses will naturally boost operating costs, although, over time, Obamacare may rein in some of those hikes while providing employees with more options. During his 2008 campaign, President Obama promised that his health-care plan “would save the average family $2,500 per year on their premiums.” With such a promise to fulfill, the president my feel pressured to implement Obamacare, as a recent study by the independent Kaiser Family Foundation shows health insurance premiums for employer-sponsored plans rose 9 percent in 2011, and another 4 percent in 2012, to an average of $15,745.

Since 2002, premiums have increased 97 percent, which is three times faster than wages (33 percent) and inflation (28 percent).

On a related note, the Kaiser study suggests that working families at the low end of the wage scale face significant out-of-pocket costs for coverage, said lead author Gary Claxton, vice president and director of the Kaiser Foundation’s Health Care Marketplace Project. “Firms with many lower-wage workers ask employees to pay more out of pocket than firms with many higher-wage workers, even though the coverage itself tends to be less comprehensive,” he noted.

Health-care Insurers

Insurance companies specializing in health-care policies are also in the crosshairs of the ACA. In some cases, given their predicament, prudent behavior dictates prompt pricing action. For example, some health insurance firms seek to win state government approval of large premium increases in 2013, prior to full implementation of the ACA in 2014.

In states like Ohio, Florida, and California, insurance firms are raising premiums to policyholders this year by 20 to 39 percent, despite the stated objective of Obamacare to limit insurance provider profits and administrative costs, and compel rebates if health-care insurers exceed specified limits.

In other words, insurers would prefer to raise their rates to clients today for fear of being coerced into policy restrictions that force them to undercharge customers tomorrow. At this juncture, they’d rather refund money for having overcharged clients than to altogether lose today’s ability to charge actuarially sound rates and obtain premium-based income.

Medical Devices

The medical device industry is also likely to suffer extra financial pain under the ACA’s tax provisions. One of the most controversial taxes, the medical device tax, will affect firms that make medical equipment. In 2014, the tax will impose a 2.3 percent rate on gross sales, even if the firm has no profit at all. Obamacare estimates the tax could generate $29 billion in revenue over the period of a decade. As a result, some medical device companies may look to move their operations overseas.

Hospitals and Medical Centers

Another industry directly impacted by the ACA is the collection of very small professionals tied into a network of very large employers. Offices of primary care physicians and medical specialists, for example, are increasingly being prodded by costs and regulations into larger structures.

The same trend is overtaking hospital facilities and nursing home operations. Both trends are likely to be accelerated by the ACA, as Washington can exercise nearly exclusive leverage when it comes to determining “acceptable” medical protocols and reimbursements.

 

The Big Picture

Moving forward, executives of private and publically traded companies say they are largely reacting to the law as it unfolds, and are becoming increasingly anxious, as are others. Many believe legal challenges to Obamacare may yet nullify the law. 

They suspect that the specialists, political advisers, and legislative analysts who compiled the ACA lack the breadth, depth, or “in the trench” experience to appreciate the “big picture.” They also recognize that Washington is inserting itself in a very nonhomogeneous sector of the U.S. economy, where technology is advancing at prodigious rates.

Stated differently, in addition to all the other segments of the marketplace into which Washington has intruded (housing, education, energy, welfare, transportation), health care would hand politicians and their staffs control of 18 percent of the U.S. economy — a segment of the GDP that is on a growth trajectory to become 25 percent of the GDP within a decade.

That’s why executives, human resource, and legal departments are scrambling to understand and rationalize their handling of provisions in the ACA. Their warnings reflect memories of Washington’s experiments and oversight with other projects — from government-sponsored enterprises such as Fannie Mae and Freddie Mac to Amtrak and Solyndra. In just the past decade, such government forays into private sector markets have contributed to staggering losses in U.S. financial integrity and in the world’s view of the dollar’s strength, while mounting debt has compromised confidence in the U.S. economy, as taxpayers (firms and individuals) are left to pick up operating and legacy costs well into the future.

Consider, U.S. credit ratings were downgraded in 2012, and are on track to be lowered again in this year. Business executives now openly question the wisdom of Washington’s timing and manner of plunging into a universal, government-run health-care system. At a minimum, in a nation on the brink of financial and monetary trauma the public should expect thorough investigation (featuring rigorous benefit/cost analyses) of cases in the world where long-standing universal health care systems have proven successful, and why.

If sufficient numbers of businesses believe the ACA is pushing them into a corner with their backs to the wall, it is no stretch to conclude that today’s mindset of eternal vigilance could turn sharply to outright rejection and nullification of Obamacare as it currently stands. db

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